Explanation:
Options on stock indices are valued in a similar fashion to stocks with dividends because it is assumed that stocks underlying the index pay a dividend yield. For options on futures, in the numerator of the up move probability equation is simply replaced with a 1.
(Book 4, Module 60.2, LO 60.e)
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Question 7
Which of the following statements regarding the binomial model for valuing options on stock is incorrect?
A
American options can be valued using the binomial model.
B
Shortening the length of the intervals in a given time period will result in more ending values.
C
A high standard deviation will result in a large difference between the stock price in an up state and the stock price in a down state.
D
Options on stock indices are valued in a similar fashion to options on futures.
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